Investors often overlook SEC filings, and it is the job of the 10Q Detective to dig through businesses’ 8-K and 10-Q SEC filings, looking for financial statement ‘soft spots,'(depreciation policies, warranty reserves, and restructuring charges, etc.)that may materially impact Quality of Earnings.

Monday, June 09, 2008

BioHeart: Too Early To Inject Hope into Heart Failure Patients

BioHeart, Inc (BHRT-$3.11) offers investors an opportunity to participate in the potentially profitable field of regenerative medicine. The Company is developing commercially viable products within the field of heart muscle repair: autologous myoblast-based clinical therapies to improve the contractile function of damaged hearts.

It's lead product candidate, MyoCell, is an innovative clinical therapy designed to populate regions of scar tissue within a patient’s heart with stem cells from transplanted thigh muscle tissue for the purpose of improving cardiac function in chronic heart failure patients (months or even years post-myocardial infarction, NYHA Class II - IV).

In our view, the Company's business strategy is sound, first obtaining regulatory approval of MyoCell to treat patients with less severe heart damage, such as a Class III subgroup. If initial regulatory approval of MyoCell for Class III Subgroup were approved, the Company would then have a reasonable basis to sponsor clinical trials in an effort to demonstrate that MyoCell should receive expanded regulatory approval to treat patients in all NYHA Classes of heart failure—and increase its leverage in valuing licensing deals.

Over the last two years, the Company has successfully increased the maximum dosage of myoblast cells injected as part of the MyoCell therapy to approximately 800 million myoblast cells, which is believed to be the most effective therapeutic dose.

In terms of clinical development, safety and efficacy data ((patient deaths and irregular heartbeats) with skeletal muscle for heart repair has been mixed.

Skeletal Muscle for Heart Repair Studies

MG Biotherapeutics was conducting a European Phase II clinical trial, MAGIC, powered to assess the safety and efficacy of two doses of autologous skeletal myoblasts, when compared to placebo injections, in the treatment of ischemic heart failure in 300 patients. In February 2006, after enrolling just 95 patients, the trial's Data Monitoring Committee recommended the termination of the study, concluding there was little likelihood that therapy would result in hypothesized improvements in heart function (contractility or global function)—although cellular therapy did appear to reverse LV remodeling.

Clinical findings from a European Phase II-a study of MyoCell, SEISMIC, presented at the American College of Cardiology 2008 Scientific Sessions in April put to bed prior safety concerns. Data suggested the implantation of MyoCell in patients with heart failure was feasible and may provide symptomatic relief. However, global left ventricular ejection fraction [LVEF] still remained unchanged.

Form a safety perspective, skeletal myoblast cell therapy in SEISMIC was not associated with an increase in arrhythmias and appeared safe (risk management included implantable cardioverter defibrillator, or ICD, and anti-arrhythmic drug therapy in study patients prior to enrollment).

In terms of clinical development pathway, BioHeart has demonstrated positive 'proof-of-concept' data surrounding the safety and function of MyoCell. Surrogate physiological efficacy markers of heart function are mixed: no-change in LVEF, but positive changes in NYHA classification and ventricular remodeling.

The SEISMIC trial was an open-label study. To eliminate the possibility of patient and investigative biases, clinical data from a pivotal Phase 3 double-blind trial (MARVEL) on MyoCell is expected in the fourth-quarter of 2009.

There is some controversy in using LVEF as a primary efficacy endpoint in clinical studies, especially in the stem cell field. "EF is a fairly imprecise and somewhat variable number even in a single patient, because it represents the summation of the contribution of every wall of the heart and its loading conditions," said Warren Sherman, MD, a principal investigator of the MARVEL study. "The EF misses changes occurring at the regional level, such as improvement in wall motion with exercise. This is especially important in evaluating area that have been injected with cells."

Cytori Therapeutics, principally involved in developing autologous, adipose-tissue derived stem cells intended to be used in breast reconstruction patients, is using its proprietary stem cell platform in cardiac patients, too. Enrollment began for the APOLLO trial in January, a 48-patient, randomized, placebo-controlled, dose escalation, safety and feasibility multi-center study. A dose of adipose-derived regenerative cells, or a placebo, will be delivered through an intracoronary catheter within 36 hours following the onset of a heart attack.

The ability to generate new muscle tissue within the scarred regions of a heart from stem cells is a new area of clinical development. As such, the commercial viability of MyoCell remains uncertain and challenging, for it is unclear what demonstrates acceptable [FDA] clinical endpoints—are improvements in NYHA Class or reduction in hospitalization rates less important surrogate markers than mixed improvement in cardiac function, such as LVEF?

Valuation Analysis

The market potential for MyoCell sales in the treatment of patients in NYHA II or NYHA Class III heart failure is significant. According to the American Heart Association and the European Society of Cardiology Task Force for the Treatment of Chronic Heart Failure, in the United States and Europe there are approximately 5.2 million and 9.6 million, respectively, patients with heart failure.

Given regulatory uncertainties, the 10Q Detective prefers to value BioHeart based on peer collaboration agreements.

For example, Boston Scientific invested a mere $5 million in Osiris’ development of Provacel for acute MI (deal recently terminated). Perkin-Elmer, which purchased ViacCell, best known for preserving umbilical cords of newborns, is selling its stem cell business', but will likely receive no more than $30 million to $50 million.

In our opinion, the science of stem cell therapies must continue to mature before large biopharma companies become more active investors. And that inflection point has yet to be reached.

We believe the 14.5 million shares of BioHeart fully-value the progress to-date of MyoCell clinical programs. This assigns nominal value to its broad pipeline of complementary product candidates for the treatment of acute and chronic heart damage, including Bioheart Acute Cell Therapy, an autologous, adipose cell treatment immediately following an MI, and MyoCell SDF-1, a proposed therapy utilizing autologous cells genetically modified to express additional growth factors.

Contrary to the opinions of management, we anticipate that the regulatory approval of MyoCell is critical for further development of these other product candidates.

The Company said pivotal data for MyoCell will not be available until 2H:09. Its stock price will likely remain range-bound until news is heard from various European regulatory bodies to market MyoCell to treat the Class III Subgroup.

Investment Risks & Considerations

The MARVEL trial will require $17 million to complete. As of April, BioHeart had only $4.7 million in cash, with a monthly burn of $1.5 million.

The Primary MyoCell Patent expiry, which covers a composition for the treatment of muscle degeneration, comprised of cultured myogenic cells for use in their administration to diseased muscle, is July 19, 2009. Under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, however, BioHeart could petition the FDA for up to a five-year extension (to compensate the patent holder for a portion of the time required for research and FDA review of the product). As the FDA will likely complete its review of—and grant approval for?—MyoCell after initial patent expiry, management expects to seek interim extension beyond July 19, 2014.

The 10Q Detective cautions investors that MyoCell is not protected by patents outside of the United States, which means that it may be vulnerable to generic intrusion—competitors free to sell products that incorporate the same or similar technologies. As a result, MyoCell would lose valuable sales in European countries, which demographics suggest could be one of the largest potential markets.

Additional intellectual property portfolio patents, including heart muscle regeneration methods and device products do not expire until December 2019, and beyond.

Corporate Governance

Florida’s unemployment rate for April 2008 was 4.9 percent, standing at its highest level since February 2004. Irrespective of the economic slowdown, BioHeart takes care of family.

Mr. Spencer, III, a member of the Board, is the father of Mr. Spencer, IV, Vice President of Clinical Affairs and Physician Relations.

Mr. Leonhardt, Executive Chairman and Chief Technology Officer, is the cousin of Scott Bromley, Vice President of Public Relations, and the brother-in-law of Ms. Sulawske-Guck, Vice President of Administration and Human Resources.

The Company, from time to time, enters into consulting agreements and arrangements with certain members of its Board of Directors, too:

BioHeart paid to Ascent Medical Technology Fund, an affiliate of 'independent' Director, Peggy Farley, Chairperson of the Governance & Nominating committee, a fee of $150,000 for the private placement of common stock in May 2007.

Mr. Leonhardt has guaranteed Dr. Murphy, a director, the repayment of his initial $200,000 investment in the Company, too!

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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About Me

Prior to founding the 10Q Detective, I held equity analyst positions with three brokerage firms and published the investment newsletter e-Growth Profit Letter - dedicated to uncovering companies with innovative, proprietary technologies in a range of industries. My work has been published in The Dick Davis Digest, The Bull & Bear Financial Report, BusinessWeek, CBS Interactive, Forbes, Kiplingers Personal Finance, MSN Money, TheStreet.com, 24/7 Wall Street, The Wall St. Journal, The International Herald Tribune, and Investors Business Daily.
The 10Q Detective is recommended as a 'Must-Read' money blog in Kiplingers (Oct. 2006 & May 2008), Washington Post (May 2009); a 'Best of Financial Blog' by BusinessWeek (Feb. 2007 & April 2008),a 'Smart Stop' by The Journal of Accountancy (March 2008); 'Top 25' by Time magazine, a 'Top 50 Money Blog' by CurrencyTrading.net (April 2008); and, a 2011 LexisNexis Business Law Blog Nominee.